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Daily Newsletter, Tuesday, 05/29/2001

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The Option Investor Newsletter Tuesday 05-29-2001
Copyright 2001, All rights reserved. 1 of 2
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MARKET WRAP (view in courier font for table alignment)
******************************************************************
05-29-2001 High Low Volume Advance/Decline
DJIA 11039.10 + 33.70 11066.00 10970.40 1.01 bln 1407/1678
NASDAQ 2175.54 - 75.49 2239.92 2170.58 1.62 bln 1360/2471
S&P 100 652.90 - 5.39 659.29 651.96 totals 2767/4149
S&P 500 1267.93 - 9.96 1278.42 1265.41 40.0%/60.0%
RUS 2000 502.37 - 6.25 508.39 502.37
DJ TRANS 2921.27 - 7.93 2934.02 2911.53
VIX 24.68 + 1.53 25.06 24.18
Put/Call Ratio 0.73
******************************************************************
Just Another Profit Warning?
SunMicro and EMC were downgraded by Goldman Sachs before the
open and that was as good as it got. The trading day for tech
stocks started out bad and got worse. The Dow dipped under 11000
but then recovered to gain +33 points. The Nasdaq however was
not so lucky. After holding the 2200 support line all morning
it finally failed at 12:15 and things started looking ugly.
The day began with Goldman Sachs downgrading estimates on SUNW
and EMC earnings. That started a chain of events which included
SunMicro delaying their analyst conference call until after
the market had closed. This started rumors in earnest that SUNW
would warn and there was serious trouble in tech land.
After the close SUNW did warn that earnings for the 4Q could be
half of analysts already lowered estimates. They cited lower
than expected sales and zero visibility going forward. The CFO
flatly refused to speculate on future earnings and said
it was "a challenging environment without a doubt." SUNW also
said that while U.S. demand was less than expected they were
now seeing weakness in Europe and Asia. This was the real kiss
of death for the techs. Europe and Asia have been the last
bastion of computer strength and if they are now following the
U.S. path then the tech recovery could be substantially farther
in our future. SUNW fell -1.80 in regular trading and another
-1.15 in after hours.
Lucatel? Not today. The long rumored and heavily reported "take
under" of Lucent was called off after the close today. The
companies said intense negotiations over the long weekend
failed to yield an agreement. Sources said that differences
over management of the combined company and country of governance
were the main causes of the divorce. Also mentioned was a fight
over choosing a new name for the company. Alacatel rose sharply
after the death sentence was announced but the real question is
what will happen to Lucent. If Lucent was willing to do a deal
for no premium or actually a negative premium then what is going
on behind the doors at Lucent? The .24% of ALA per every share
of LU works out to about $6.48 for every Lucent share. There
were other considerations to bump the real price but any way
you look at it Lucent was looking for a life raft. That life
raft would still have seen 20,000 to 30,000 jobs being cut. It
is also entirely possible that another bidder, upon hearing the
bargain basement price, decided to give the LU CEO a call. We
may not know if that is the case for several days but it is
a good possibility. The real price may now get even cheaper
if no white knight appears. Without the financial backing of
Alacatel, Lucent may face a run on its stock as investors
worry about the stink coming from the boardroom. It is going
to be very difficult for Lucent to get any respect for quite
a while. The good news here is the lack of a recapitalized
competitor in the networking sector. Stocks which took serious
hits on the news of the merger like JNPR and CIEN could rally
on the news of its failure.
Consumer confidence came in this morning at 115.5 and above
estimates of 111.3. Consumers were buoyed by a market rebound
and the drop in interest rates. They are still spending and
planning on spending as the expectations component clearly
showed. The index has bounced positive two of the last three
months and it is closely watched by Greenspan. A positive
consumer confidence would slow the Fed's need to cut rates
much further. Personal income edged up slightly by 0.3% in
April and Personal Spending grew by +0.4% which was the
fastest monthly growth rate so far this year.
The movement in the markets today came on very light volume.
The NYSE did manage to break one billion shares only slightly
but the Nasdaq only managed 1.59 billion shares. Tech investors
were sitting patiently on the sidelines hoping that the SUNW
rumor would simply blow over and support would hold. Neither
came to pass. Declines beat advancers on the Nasdaq by almost
2:1 and the SUNW announcement after the bell could pressure
trading on Wednesday as well. Just announcing an earnings
warning would not have had much impact by itself. However
the inclusion of the keywords "Asia" and "Europe" are sure
to cause investors to rethink jumping on the tech bandwagon.
I said "sure" to rethink but of course nothing is ever sure.
Could investors shake off this serious warning and buy techs?
Sure, they could, and it would be very bullish if it happened.
We are only a week away from the official start of earnings
warning season where this type of event will be a daily
occurrence. Actually, SUNW, made their announcement very
early in the cycle. They are a late cycle reporter and this
early announcement might be a warning signal we should heed!
Support at 2250 failed, 2200 failed and should 2175 fail the
next stop could be 2050. The Dow rebound back above 11000
could also be in jeopardy because of the Dow techs MSFT,
INTC, IBM and HWP which could make any gains on Wednesday
tough to achieve. Nasdaq traders should be flat or short until
we hit 2250 on the upside again. I would not be a dip buyer at
this point. Let's wait and see how investors react to the SUNW
news before attempting to pick a direction.
Away from your computer? Call 900-378-PICK and get this
information along with the intraday updates and plays.
Enter passively, exit aggressively!
Jim Brown
Editor
****************************
June Online Seminar Calendar
****************************
You can take the following seminars without leaving the
comfort of your home or office. They are interactive and
allow you to question the presenter during the presentation.
You do not need any special software to take the seminar but
you must have a 56K Internet connection or faster for best
results and a separate phone for the audio portion.
If you are interested in these seminars please click here
for more information.
http://www.premierinvestorseminars.com/seminarcalendar.asp
Wed May-30 Capturing Stock Appreciation with Leap Puts - Jim Brown
Sun Jun-3 Optimize Your Daytrading Skills - Austin Passamonte
Wed Jun-6 Introduction to Technical Analysis - Derek Baltimore
Thr Jun-7 Using Volatility to Pick Stocks - John Seckinger
Sun Jun-10 Advanced Chart Reading & Retracements - Eric Utley
Sun Jun-10 Basic Technical Analysis - Austin Passamonte
Mon Jun-11 Psychology of Trading as a Business - Matt Russ
Tue Jun-12 Starting with Point & Figure Charts - Jeff Bailey
Wed Jun-13 Ask the Analyst - Eric Utley
Wed Jun-13 Basic Option Strategies - Jim Brown
Thr Jun-14 Using Volatility to Pick Stocks - John Seckinger
Thr Jun-14 Basic Candlesticks - Jon Farnlof
Sun Jun-17 7 Steps to Play Picking - Matt Russ/Eric Utley
Mon Jun-18 Zero Cost Leaps - Mark Wnetrzak, Ray Cummins
Tue Jun-19 Understanding Option Volatility - Matt Russ
Tue Jun-19 Profiting From Failed Technical Patterns - John Seckinger
Wed Jun-20 Chart Patterns, Flags, Pennants, Wedges - Derek Baltimore
Wed Jun-20 Entry Point, Exit Point - Jim Brown
Thr Jun-21 Day-Trading for People WIth Day Jobs - Jon Farnlof
Sun Jun-24 Determining Support and Resistance - Derek Baltimore
Sun Jun-24 Ask The Analyst - Eric Utley
Mon Jun-25 Using Retracement Levels - Matt Russ
Tue Jun-26 Assessing Risk with Point & Figure - Jeff Bailey
Tue Jun-26 Charting, Stage Analysis - Mark Wnetrzak, Ray Cummins
Wed Jun-27 Big Cap Strategies - Jim Brown
Wed Jun-27 Conservative CC/NP - Mark Wnetrzak, Ray Cummins
Click here for a detailed explanation of each:
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****************
MARKET SENTIMENT
****************
Testing The Waters
By Matt Russ
Sun Microsystems (NASDAQ:SUNW) got hammered today both before and
after the bell. It's the first bit of "bad" news in a little
while and will certainly challenge the Nasdaq tomorrow. The
Nasdaq shed another 3.35% today on light volume, only 1.6 bln
shares. So where are all you buyers hiding out? What are you
waiting for? After SUNW's warning that 4th quarter earnings and
revenues will be lower-than-expected, the Nasdaq will be at a
point of reckoning tomorrow. Will bargains be had? Maybe Goldman
will be in buying tomorrow after Laura Conigliaro, analyst for
the firm, cut profit estimates for both SUNW and EMC before the
bell. It should be a good day for gauging sentiment.
NASDAQ & QQQ
We talked about wanting to see support at 2232 hold after the
Nasdaq closed at 2250 on Friday. That was the point from which
the index broke out last week after forming the bullish wedge.
The Nasdaq broke down through that support level and slid to the
next level of support near 2166. Given the SUNW news, we will
likely see a battle in the 2150 - 2166 area between bargain
hunters and the shorts. Below that, support will lie at 2125,
the 38% retracement line. Resistance will once again be that
pivot point of 2232. On the QQQs, they closed right at support
of $46.10. Expect support around $45.82 with resistance at
$46.73 and $47.36.
SPX & OEX
The SPX gave up its breakout point at 1272 today as a support
level. A brief bounce at 1270 only led to further selling
pressure into the close, finishing at 1267. With that key
level violated, the next support will be at 1265, which was
today's low, and then 1260. If selling pressure prevails that
latter level, expect the SPX to head to 1250, which is around both
the head-and-shoulder objective and the Point & Figure bearish
target that I mentioned on Sunday. Resistance will be the
previous level that the SPX battled for so long prior to breaking
out two weeks ago: 1272. On the OEX, support at 650 and 646,
with resistance at 657 and 660.
DOW 30
Early morning support at 11,000 finally gave way in the afternoon.
The $INDU drifted to a low of 10970 on light volume before buyers
stepped up. The rebound was nice, though. Increasing volume into
the close took the Dow 30 into resistance at 11050. This is the
index's immediate resistance, followed by 11106. The Dow still
has strength and even given the recent profit taking, it's the
place to be if you are a bull. It looks like demand was strong
at 10970. If this level is broken and a lower low is established,
supply would likely be taking over and more downside to come.
SUNW had a lot of trouble today. Tomorrow will be telling. Will
the tech bargain hunters be out and about supporting this recent
run? Volatility is beginning to increase a bit as the VIX.X
added 1.53 points to 24.68. It even edged above 25 for a moment
in the morning. This may portend to further downside, but it is
important to stress that the markets are in a consolidation phase,
where flux is the standard. Everyone will be watching for the
reaction to the SUNW warning after the bell to really gauge the
sentiment of this market. Until then, watch those levels.
Trade Smart,
Matt Russ
**********************
CBOT Commitment Of Traders Report: Friday 05/25
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts on the
Chicago Board Of Trade.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs are not.
Extreme divergence between each signals a possible market turn in
favor of the commercial trader’s direction.
Small Specs Commercials
S&P 500 (Current) (Previous) (Current) (Previous)
Open Interest
Net Value +63916 +65713 -70908 -72034
Total Open
Interest % (+31.81%) (+32.56%) (-10.01%) (-10.15%)
net-long net-long net-short net-short
DJIA Futures
Open Interest
Net Value -7101 -7166 +8925 +8151
Total Open
Interest % (-51.65%) (-54.70%) (+23.70%) (+22.89%)
net-short net-short net-long net-long
NASDAQ 100
Open Interest
Net Value +444 +4578 -9946 -12711
Total Open
Interest % (+2.24%) (+26.20%) (-14.87%) (-21.87%)
net-long net-long net-short net-short
What COT Data Tells Us
**********************
Indices: Commercials held their net short positions on the S&P
500 at 10 percent. Small Specs showed a tremendous reduction in
net-long positions on the NASDAQ 100 while the Commercials
lightened up on their net-short positions on the tech index.
Data compiled as of Tuesday 05/22 by the CFTC.
**************
MARKET POSTURE
**************
Please visit this link for Market Posture:
http://www.OptionInvestor.com/marketposture/052901_1.asp
***********
OPTIONS 101
***********
A Skew Refresher
By Lee Lowell
In my last column we talked about ratio spreads and how important
it is to find options with the correct "skew" to ensure maximum
results. I have some friends who still ask me about skew and what
it is and how it comes about and how to use it correctly. So I
want to use this week's article as another skew review.
Every option that is available for trading has a component within
its pricing structure called "implied volatility." You can solve
for this number by using an option calculator. You enter in all
the known values for the specific option you are interested in,
and then the calculator will give you it's implied volatility at
that moment in time. It is an ever-changing number. The implied
volatility of that option is a prediction by all the options
players of how they think the underlying stock or index is going
to fluctuate over the life of the option. Implied volatility is
also an indicator of how expensive or cheap those options are
relative to its past behavior. In my experience, and according
to most other option players, the at-the-money (ATM) options are
the most widely used when assessing the "overall" implied
volatility of that specific market.
You would think then that every option available on the same stock
should have the same implied volatility, right? Not necessarily.
But when they do have the same IV (implied volatility), this would
be called a "flat skew" and some stocks do exhibit this pattern,
but not many. Usually every option on the same stock or index
will have a slightly different IV than the next strike above and
below it, and have a greater IV differential than the strikes a
few dollars away. Why does this happen is the most common
question. It is because of speculation and emotion of the market
players. When traders feel they know which direction the market
is headed, they will purchase cheaper, out-of-the-money (OTM)
options (puts or calls) in large quantities. When the market
makers on the exchanges get swamped with larger volumes of these
OTM options, the only way to protect themselves is to raise their
ask prices on the contracts. This in turn bumps up the IV on
those specific strikes. The IV on those particular strikes will
see its level move up or down more than its neighbor options, thus
causing either a "forward skew", a "reverse skew", or what I like
to call a "smiling skew."
A forward skew is a pattern that occurs when each successive
higher strike option has a higher IV than the strike below it. A
reverse skew is when each successive lower strike option has a
higher IV than the strike above it. And a smiling skew is a
pattern that incorporates both a forward and reverse skew that
starts from the at-the-money options.
Here is an IV skew chart of a random security. It's easier to see
what I'm talking about when you visualize it graphically. The
strike prices are on the bottom and the volatility levels are on
the sides. This a typical smiling skew graph. This particular
security is trading for about $28.50 and its ATM options are the
cheapest on an IV basis. As you move higher and lower with its
strike prices, the IV gets higher in both directions. The little
blue squares are the actual IV of each strike as of the close of
trading from Friday. The solid line is basically a
connect-the-dots line to show you the pattern.
This is all well and good, but how does skew help our trading?
Skew patterns are very helpful when instituting option spreads.
When looking at the IV for each option in your spread, it will tell
you what kind of advantage or disadvantage you will be playing
with. If the options have a flat skew, then you will be buying
and selling each option in your spread at the same IV, and there
will be no advantage/disadvantage to your strategy. If you buy
the long side of your spread at a lower IV than the sell side, then
you have an advantage. Take a look at the Applied Materials (AMAT)
put option chain (we used this last time too, but prices are
updated).
With AMAT around $52, that would make the $50 and $55 puts the
closest ATM strikes and thus should be somewhat similar in its IV.
Again, if you look at the "Imp Vol(B)" and "Imp Vol(A)" columns,
these are the implied volatilities in percent based off the actual
bid and ask prices respectively. For the most part, AMAT is
exhibiting a reverse skew where the IV's get increasing larger as
we move from the higher strikes down towards the lower strikes.
The skew does start to flatten out as we look at some of the
highest strikes.
The best way to take advantage of this skew would be to implement
a bear put spread if you felt that AMAT was going to move lower
over the near-term. This would allow you to buy a cheaper option
and sell a more expensive option on an IV basis. The spread would
still be a debit from your account, but it is a smaller debit due
to the favorable skew pattern.
For example, we can buy the July $50 puts at $3.80 for an ask IV of
60% and sell the July $40 puts for $1.05 at a bid IV of 70%. This
is a very favorable bear put spread in terms of skew. We bought
our long leg at 60% IV and sold our short leg at 70% IV for a total
debit of $2.75. So what, you say? Well, let's see what would
happen if AMAT was showing a forward skew where we'd buy our long
leg at a higher IV than where we'd sell the short leg. Just for
example sake, I ran some numbers through my calculator and wanted
to see what the spread would be worth if we bought the $50 put at
70% IV and sold the $40 put at 60% IV. Using those values, the $50
put would now be worth about $4.35 and the $40 put would be worth
about $.60, making us now pay $3.75 for that bear put spread.
That's a full $1 dollar higher than when we purchased it when AMAT
had the reverse skew.
It is imperative that you check IV before initiating any kind of
option spread to see what your chances look like. It doesn't mean
that you can't put on the play even if the skew is unfavorable.
Just know that you will be starting at a disadvantage if you do.
There is also another reason why certain strikes exhibit different
IV's from its neighbor strikes. If AMAT is at $52 currently, and
the ATM $50 put options have an IV of 59.5%, this tells us that
the market thinks AMAT will move about 59.5% above or below where
it is today over a certain period of time. At the same time, the
OTM $40 puts have an IV of 70%. What this might mean is that if
AMAT starts tanking and is trading at $40 next week, then the $40
puts will become the ATM strike and the market will now think that
AMAT can move 70% above and below where it is today. Make sense?
Once a stock or index starts fluctuating around, then IV usually
goes up because traders feel that bigger moves can happen. This is
why OTM options can have a much higher IV than the current ATM
option. Because if the stock moves quickly towards that OTM
option, the market will re-price the options with higher IV's
knowing the stock has the ability to blast through strikes with
ease. So the market makers want to be compensated for that by
raising their asking prices.
This may seem confusing to some but it is a good concept to learn
about. Implied volatility is alive and well in the options market
and it is primarily how I base my own trading decisions. If an
option trade ever went against you even though your call on the
direction was correct, I'll be it was because you didn’t check the
IV level of the options beforehand.
Good luck.
**************
TRADERS CORNER
**************
Decide What Kind of Trader You Want to Be
By Scott Martindale
I was leaving my desk the other morning to go to the gym, and my
wife asked me, "Aren’t you trading today?" It suddenly dawned on
me that my wife thinks I day trade. I think she tells her friends
this, too. But I really execute very few intraday trades. I
really consider myself a short-term or position trader, i.e., I
put on positions and monitor them over a few days or a few weeks.
And beyond that, I spend most of my time on projects other than
trading.
I really don’t have the temperament or interest to be a full-time
daytrader, with my eyes continuously glued to the screen. I
prefer to put on positions that I can monitor periodically over a
period of days or weeks. I like to sell premium rather than buy
it, and the best time to do so is when the VIX is high and markets
are oversold. I generally aim to hold the position through
expiration, unless I can close out early at a very cheap price or
if it moves strongly against me. I am a "cautiously aggressive"
trader who has learned the hard way that "playing your gut" -
rather than trading mechanically and unemotionally -- is a losing
strategy almost every time. Yet I also have learned that the
gains are larger if you enter prior to technical confirmation of a
move.
So what kind of trader are you? What kind do you want to be?
They are not necessarily the same things. Are you conservative or
aggressive? Do you prefer to sell premium or buy it? Do you
prefer to cover yourself with spreads or go naked for the gusto?
Front-month options, mid-term, or LEAPS? I think it’s best to
specialize in only a few strategies.
OIN’s featured plays give an "aggressive" entry suggestion on a
bounce off near-term support and a "conservative" entry on a break
through near-term resistance. Which entry do you gravitate
toward? In a trading-range market, sometimes the "aggressive"
entry is actually more conservative in that (for a bullish play)
the underlying is at a lower price. Breaks above resistance may
run further, particularly if there is significant short interest,
or it may turn and sell off as traders take profits in the face of
the latest macroeconomic news. No matter which entry you use, the
purchase of front-month options demands close monitoring and hair-
trigger exiting -- not the most comfortable way to play for most
part-time traders. Buying more time is generally a better bet,
and not too far out of the money.
If you like to sell premium as I do, remember to watch your back
with the same hair trigger. Although the erosion of time premium
in an indecisive market works in your favor, don’t ride too long
on a move against your position. And if the underlying stock
moves in your favor but there is still a good bit of time until
expiration, watch the technical picture and any important dates
(like earnings) to give you guidance regarding locking in a profit
or legging into a spread to limit your exposure.
Exit strategies are critical. Effective exits might be based upon
technical cross-overs (like 50/200 day price moving average or
stochastics moving through 80/20 lines), support or resistance
bounces or penetrations, option open interest "congestion," fixed
percentage pullbacks, or percentage pullbacks versus a benchmark
or major index. Which best fits your plan and temperament? Are
you willing to allow wide swings, or do you want out quickly?
Be cautious with stop loss orders on thinly traded options. Some
brokerages don’t consider your stop price to be triggered until
another trade has executed at or beyond that price. For example,
you might buy a call for $4.50 and place a stop at $3.00, but the
option might go all the way down to, say, $1.50 before it sees
another execution, and that is the price you will get soon
thereafter. Other brokerages might help you get execution when
the market maker posts a bid (for instance) at your price.
Alternatively, a brokerage like Preferred Trade allows stop orders
on options based on the underlying stock price, which is the most
sure-fire way to get a fair execution. However, even this won’t
protect you with a long option position if the stock doesn’t move
much but the option time premium continues to erode, so you still
must regularly monitor the current bid.
As a trader, you must sort through the clutter of information and
think for yourself. Establish a watchlist of stocks that your
research indicates to be near- and long-term movers, and then
watch for favorable technicals as well as overall market and
sector sentiment. Aggressively protect your capital. Select a
strategy that works for you and stick to it. If you find it no
longer is profitable, stop trading for a bit and review your
strategy. Perhaps you’re not following the plan, or perhaps
prevailing market conditions are not favorable for your particular
approach.
Decide what kind of trader you want to be, prepare your plan,
execute, and continually evaluate.
As for current market conditions, they are still a bit weak, but
external conditions portend a return to rising prices. Five rate
cuts (and another on the way?) are already starting to show impact
in the form of new corporate debt offerings and increased capital
spending programs. A long-anticipated tax cut is now reality.
The 14-month bear market is showing its gray. The inventory
correction may be drawing to a close. The mutual funds already
were holding too much cash, and now there is an acceleration of
equity inflows, and they need to put some cash to work. Also,
keep in mind that as rates come down and bond yields fall with
them, stocks begin to look more appealing -- especially with the
prospect of real earnings growth. And those earnings expectations
are so modest at this point that they very well may be surpassed.
Then the analysts will start issuing upgrades (a lagging indicator
of sorts). [Will that then be the death knell of the rally?
Let’s hope not.]
When former resistance levels are broken and become support as
they have, the odds favor buying the dips going forward. We got
the dip I was expecting going into the long weekend, although the
technicals still have not quite retraced enough from the extreme
overbought condition -- thus today’s continued weakness. But I
hope and expect the markets to firm up soon.
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PICKS WE DROPPED
****************
When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.
CALLS:
*****
IBM $115.27 -2.53 (-2.53) A broad based sell off with emphasis
on the technology sector took its toll on IBM Tuesday.
A downgrade of EMC and SUNW by Goldman Sachs set a bearish tone
for the hardware stocks. In addition, the unenthusiastic market
response to the possible Alcatel-Lucent merger helped to cause
selling among many of the computer technology sectors, and
continued downgrades of software giants like ORCL added to
the selling pressure. So, at this point, we must bid adieu to
IBM, as it closed below our stop level.
QCOM $66.18 -1.34 (-1.34) QCOM rallied last week on the news
that their CDMA technology could receive broad based deployment
in the Chinese market in the coming years. However, the overall
bearish market sentiment which prevailed on Tuesday, combined
with weakness in the communications equipment sector,
overwhelmed the optimism QCOM shareholders enjoyed last week.
Considering the fact that QCOM closed below our stop set last
week, we must drop it tonight.
MCDT $34.01 -5.59 (-5.59) As mentioned on Sunday's write-up, the
apple does not fall far from the tree. In sympathy with news
that parent company EMC would cut 1100 jobs in an effort to boost
short term profit numbers, along with a earnings cut by Goldman
Sachs, the storage sector as a whole had a down day, with Storage
Area Network (SAN) spin-off MCDT dropping over 14 percent. While
volume was below average, MCDT's close was below our stop price
of $38. Teetering precariously above support at $34, we are
dropping coverage of this play.
QLGC $55.73 -2.80 (-2.80) We are taking profits on our call play
on QLGC. While shares of the Storage Area Network (SAN)
equipment maker found support from it's 10-dma ($54.57) today,
negative sentiment due to worries in Tech earnings appears to be
on the forefront of traders' minds. With that, QLGC pulled back
4.78 percent on 1.14 times the average daily volume. The strong
selling volume today combined with the close below our stop price
of $57 are just two of the reasons that suggest the possibility
of further near-term downside. Eager to preserve our gains, we
are taking our money off the table on QLGC.
PUTS:
*****
No dropped puts tonight
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The Option Investor Newsletter Tueday 05-29-2001
Copyright 2001, All rights reserved. 2 of 2
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PLAY UPDATES - CALLS
********************
FMKT $13.78 -1.02 (1.02) FMKT demonstrated amazing resilience
in today's downturn on the Nasdaq. The stock dropped to $13.90
in the morning, a level at which support seemed impenetrable
for the rest of the day. Light volume indicated that few sellers
were present. We really would like to see a move up in this stock
to a level at which shorts would be forced to cover, which could
occur if FMKT were to make a strong break above $16. News was
released on Tuesday morning which stated that SPX had licensed
FMKT's quick support solution, which may have helped to bolster
the share price. We are keeping stops set at $13.50, so be
prepared to drop the position upon a close from this level.
FFIV $12.72 -0.59 (-0.59) Company news is hard to come by for F5
Networks, so let's focus on the stock's technical position and
its reactions to sector and market sentiment. On the first day
back following the holiday weekend, sellers took some chips off
the networking table. A breakdown in shares of BRCD and NTAP
lead FFIV lower as the NASDAQ floundered. FFIV fared well
overall and settled in at the 10-DMA, a site of previous support
during pullbacks. This bullish disposition, above the stock's
previous level of technical resistance found at $12, denotes
strength. However, it's absolutely crucial that FFIV explode
upward AND through the $14 level if it's to remain a viable call
play. We're looking for sweeping momentum to create the
necessary intraday volatility to make FFIV more profitable.
Intraday volume above 50 K suggests buyers' interest and signals
a potential entry into the play. Those who are risk-adverse
should be patient for the big breakout through $14 before
beginning plays.
DELL $25.65 -1.35 (-1.35) The pre-holiday doldrums saw DELL and
other hardware stocks hunkering down at their respective support
levels; although DELL gets a gold star for being the " only
regular on the Nasdaq most active list to show green" on Friday!
The slight pause in trading ahead of Memorial Day gracelessly
turned into strong selling today. The was no doubt which side
was in control of the hardware sector - the Goldman Sachs
Hardware Index (GHA.X) plummeted through its 340 support level
from the word go! The good news? DELL made a strong bounce off
our $25 closing mark, providing some confidence that it can
resume its uptrend in the company of a cooperating NASDAQ. If
you're looking for more conclusive evidence that DELL is poised
to run, wait for the critical move through $27 before buying
into subsequent momentum. Today's industry news was paramount,
it's simply unfortunate it couldn't lift share prices.
After much ado, Intel unveiled its long-awaited Itanium
processor. The new chips are expected to lower prices and
increase competition in the server and workstation markets for
the likes of Hewlett-Packard and Dell Computer, who were among
the first companies to announce use of the high-end hardware.
CEFT $50.70 +0.10 (+0.10) Despite weakness in the NASDAQ today,
shares of electronics transaction processor CEFT continued to
edge ever higher, making yet another new all-time closing high.
Ending the trading session up fractionally, volume was light, but
bullish considering that the stock did so in face of less than
ideal market conditions. It appears that the stock continues to
benefit from positive sentiment generated from the upgrade last
week by UBS Warburg, who raised their rating on the stock from a
Buy to a Strong Buy. With its current up-trend still firmly
intact, another break above the $51 level with conviction could
be the signal for conservative traders to take a position,
provided that sector peers FDC and PAYX are also moving higher.
Aggressive players looking for entries on intra-day pullbacks may
find support at $50.25, $50, the 5-dma at $49.82, $49.50, the
10-dma at $48.21 and our closing stop price of $48.
CSCO $20.46 -1.59 (-1.59) Thomas Weisel initiated coverage on
Networking giant Cisco today, with a Buy rating. Stating that
the stock has found a bottom at the $18 to $20 area, with limited
downside risk, they called CSCO a core holding, expecting a
sequential up-tick in revenues in September and setting a
12-month price target of $30. Despite the bullish coverage, the
stock pulled back today due to Goldman Sachs cutting its earnings
estimates on large cap Tech peers EMC and SUNW, saying that
earnings prospects have yet to show improvement. With that, CSCO
ended the day down 7.21 percent on above average volume. Now
near strong support and our closing stop price of $20, a bounce
off this level may be the signal for aggressive traders to jump
in, but confirm with volume. If CSCO moves back above $21 in
conjunction with a rallying AMEX Networking Index (NWX), this
could provide conservative traders with an entry on strength.
MSFT $70.34 -0.57 (-0.57) Despite negative brokerage house
coverage affecting two major large cap Tech stocks today, shares
of leading Software maker Microsoft firmly held its ground. EMC
and SUNW had their earnings estimates cut by Goldman Sachs
analyst Laura Conigliaro, who cited that prospects going forward
have yet to show any improvement. With that, Tech stocks in
general had a down day, and while MSFT did pull back fractionally
on light volume, it acted as a pillar of stability for the
NASDAQ. At this point, a move back above the 5-dma (now at
$70.59) could allow conservative traders to make a play, with
formidable resistance at $72 still to be challenged. For entries
on pullbacks, aggressive traders may target support levels at $70
and our closing stop price of $69.50. In gauging sector
sentiment, keep an eye on Merrill Lynch's Software HOLDR (SWH).
As well, movements in the NASDAQ 100 (QQQ) may provide a clue as
to possible direction for MSFT.
ABGX $42.20 +0.20 (+0.20) Despite the weakness seen in the
Biotechnology sector, ABGX bucked the trend and managed to eke
out a fractional gain today. That's a nice sign of strength,
given the broad-based weakness across the technology market.
Once again, the 10-dma (currently $40.83) provided support for
the stock to bounce up above the $42 level at the close. After
such a strong rally in mid-May, some consolidation was
necessary, and that is precisely what we have seen over the past
week as the $42 level has continued to act as a price magnet.
The narrow range day today failed to provide any attractive
entry points, and we are left waiting for more favorable price
action before initiating new positions. Conservative players
can target new positions on a volume-backed rally through either
the $44 or $46 resistance levels, while more aggressive traders
will want to target a renewed bounce from the $40 level, which
happens to be the location of our stop. For ABGX to continue
its rally, we will need to see the Biotechnology index (BTK.X)
resume its upward trend.
IMCL $48.44 -1.62 (-1.62) The recent Biotech rally seems to be
weakening, and selling of technology issues didn't help matters
much on the first day back after the long weekend. While the
Biotechnology index (BTK.X) gave up just over 2% on Tuesday, our
IMCL play gave up 3.3%. That isn't the kind of relative
strength we are looking for, especially when the volume came in
at 85% of the ADV. Like the BTK, our play is consolidating its
recent rally and we need to see it hold above the $47 support
level (also the location of our stop) to keep it alive. Adding
to this support level is the 10-dma (currently $46.98).
Aggressive traders can target shoot new entries on a bounce from
the $47 level, but only if it is accompanied with solid buying
volume. More conservative investors will want to wait for IMCL
to clear the $50 level before taking a position.
OAKT $10.81 -0.49 (-0.49) Today definitely wasn't the day for
initiating new plays in OAKT, as the broader technology market
headed south, led by Semiconductor and Networking stocks. After
the initial morning drop, OAKT solidified at $10.80 for the rest
of the day, while the stock traded just over a third of its ADV.
Light volume, along with the fact that the selling didn't pick
up throughout the day is a good sign of relative strength, and
our entry strategy remains intact. Remember that this is an
aggressive play and we don't want to try buying the dips. We
want to see strong buying volume propel the stock through the
$12.50 resistance level before taking a position.
OPWV $41.73 -3.65 (-3.65) Pressured by weakness in the broad
technology market, OPWV dropped early in the day Tuesday, but
buyers stepped in to confirm support near $41. It was nip and
tuck this afternoon as the stock dipped below this level twice
before recovering a bit prior to the close. Recall that our
stop is sitting at $41, and a close below this level will have
us closing the play. Volume came in at 85% of the ADV again,
and our play is clearly at a pivotal point. Now that the NASDAQ
has failed to hold above the 2250 level, OPWV could be in for
some sympathetic selling if the Tech weakness continues. Daily
stochastics are beginning to roll over in overbought territory,
and if the price drops and closes below $41, it will open the
door for a sustained downward move. But on the brighter side,
if buyers show up to defend the stock at that level, it could
prove to be an attractive entry point for aggressive investors.
The more conservative entry strategy at this point will be to
wait for a solid move through the $46 level, where the stock
found resistance last Friday.
*******************
PLAY UPDATES - PUTS
*******************
MIR $40.15 -0.80 (-0.80) While the stock's average volume
reflected the stock's flat activity today, an early morning
breach of the $40 level rendered a bright spot in a rather
leisurely day of trading. The scales are still tipped in our
favor as we proceed with a put play on MIR; although, it'll be
important to watch for a definitive move through the supporting
30-dma ($39.91) before jumping in headfirst. Take a look at a
two-month chart with 30 & 50 DMA lines to visually confirm the
importance. In April, the 30-dma acted as a primary entry point
for interested buyers, with the 50-dma serving as the safety
net. Keep that in mind if you choose to take positions before
the technical breakdown occurs, the best advice is to proceed
cautiously and use stops! Our closing mark is firmly in place
at a revised level of $42.
BMY $54.16 -0.04 (-0.04) It's now or never. The two days of
moderate advances leave BMY at a turning point. Today's
soft roll off the 10-dma at the $55 upper resistance bolstered
confidence going forward; but nonetheless, it's imperative to be
patient for downward confirmation. From an aggressive
standpoint, a decline through the 5-dma and $54 offers a
potential entry in a declining market environment. But better
odds comprise of a high-volume slide through $53 coupled with a
strong challenge of $51.93, Thursday's intraday bottom. The
current price level marks the historical proximity of where
buyers have stepped in to scoop up shares of BMY. Therefore,
it's very important to be prepared for a sharp break to the
upside. Keep closing stops in place at $55!
JNPR $46.39 -5.77 (-5.77) Networking stocks got slammed right
from the open today on nervousness surrounding the implications
of the possible merger of Lucent Technologies and French firm
Alcatel. Whether this was actually the cause, or just an
excuse, it gave bears the incentive to break JNPR out of its
6-week bearish wedge. Support had been firm at $52, but that
disappeared (along with the $50 support level) before amateur
hour was over. Volume came back into the stock as the price
dropped throughout the day, finally finding some support near
$46 towards the end of the day. Sellers are definitely back in
control after smashing a couple solid levels of support and
pushing JNPR below its 50-dma ($51.75) for the first time in
over a month. Prior support at $50 should now act as
resistance, and that is the new location of our stop.
Aggressive traders will want to target intraday rallies near
this level for new entry points, while the more conservative
approach will be to open new positions as JNPR drops through
today's $46 support level.
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**************
NEW CALL PLAYS
**************
AGGRESSIVE:
NOVN - Noven Pharmaceuticals Inc $32.61 +0.66 (+0.66 this week)
Noven Pharmaceuticals develops advanced transdermal and
transmucosal drug delivery systems and technologies. Their
principle products are for use in hormone replacement therapy.
Noven's first commercial success was an estrogen patch for the
treatment of menopausal symptoms marketed under the brand name
Vivelle in the US and Canada. Noven holds over 20 additional US
patents relating to its products and technologies.
A superlative earnings release on May Day ushered in a round of
applause from CE Unterberg Towbin, who recommended NOVN as a
Strong Buy and issued a $39 price target. In a statement
distributed by Business Wire, Noven Pharmaceuticals reported 1Q
profits of $0.11 p/s, crushing the $0.09 average consensus. The
unexpected results propelled NOVN out of the tawdry price levels
below $20. A positive presentation at the UBS Warburg 5th Annual
Global Specialty Pharmaceuticals Conference on May 21st acted as
another powerful catalyst to fuel NOVN's run in the advancing
marketplace. NOVN nonetheless, hit a pothole a couple days
later. The dynamics of a faltering NASDAQ and a strong pullback
in the Biotechnology Index (BTK.X) on May 23rd drove NOVN back
its previous resistance at the $29 level. The unfortunate irony
of the day was the company's spectacular announcement. Noven
Pharmaceuticals announced that it was issued a US patent
to the transdermal delivery of methylphenidate for the treatment
of Attention Deficit Hyperactivity Disorder (ADHD). The
proprietary technology for delivering a therapeutically effective
dose of methylphenidate, the benchmark medication for ADHD, for
up to 24 hours via a transdermal patch is ultimately, extremely
lucrative. The patent is effective through the year 2018. The
volume has indeed subsided this week; however, NOVN has returned
to the upper trading levels and appears ready to retest the 200-
DMA line of resistance. A definitive and visible move through
the $34 mark, accompanied by a bullish move in the BTK.X, alerts
momentum traders to jump into the play. Make sure there's
reasonable intraday activity of approximately 50 K exchanging to
back the climb. We're initiating our a protective stop at $33
and will drop coverage if NVON cannot forge ahead and close above
this level.
BUY CALL JUN-25 NPQ-FE OI= 83 at $8.10 SL=5.75
BUY CALL JUN-30*NPQ-FF OI= 58 at $3.60 SL=2.00
BUY CALL JUN-35 NPQ-FG OI= 33 at $1.10 SL=0.25
BUY CALL JUL-30 NPQ-GF OI= 55 at $4.70 SL=2.75
BUY CALL JUL-35 NPQ-GG OI=124 at $2.20 SL=1.00
Average Daily Volume = 453 K
http://www.premierinvestor.com/oi/profile.asp?ticker=NOVN
AMGN - Amgen Inc. $67.30 +1.43 (+1.43 this week)
Amgen, Inc. is a global biotechnology company that discovers,
develops, manufactures and markets human therapeutics based on
advances in cellular and molecular biology. The Company
manufactures and markets four human therapeutic products, EPOGEN
(Epoetin alfa), NEUPOGEN (Filgrastim), INFERGEN
(Interferon alfacon-1) and STEMGEN (Ancestim). Amgen uses
wholesale distributors of pharmaceutical products as the principal
means of distributing the Company's products to clinics, hospitals
and pharmacies.
Despite the downward pressure the Nasdaq has been experiencing
over the last few days, the biotechnology sector has been holding
up admirably well. The BTK.X broke out of its long term downward
trend with a surge up past its 50-dma of 524, as well as strong
resistance at 550, early in May. While BTK.X retreated from a
high of 646, the sector remained above an important support level
of 600 today, in a sign of technical strength. AMGN is one of the
largest and most profitable biotechnology companies, with a
strong pipeline of products, as well as strong funding for their
products under development or in FDA approval. AMGN has been
forming a strong bullish wedge over the last several weeks, with
a pattern of higher lows at important support levels. On May
14, during the American Society of Clinical Oncologists meeting,
AMGN presented good news which was sufficient stimulus to propel
the stock above its 50-dma of $59. AMGN showed results from their
data which suggests that one of their new products, ARANSEP, is
well tolerated, and may be effective in correcting the anemia
associated with chemotherapy. This follows additional studies
regarding other new products for the treatment of neutropenia.
Having surpassed resistance at $59, the next challenge was the
200-dma of $65, and AMGN handily crossed this level last week,
and appears determined to clear the next resistance level at
$67.50. A pullback to $66.50 could be a good entry point, if
others in the sector, like IMCL and DNA, as well as BTK.X are
rallying. Alternatively, wait for a strong break above $67.50
with volume, which could propel AMGN to $70, market conditions
permitting. We are setting closing stops at $65, so end the
position if AMGN closes below this level.
BUY CALL JUN-65*YAA-FM OI= 7859 at $3.70 SL=1.75
BUY CALL JUN-70 YAA-FN OI= 8985 at $1.20 SL=0.75
BUY CALL JUL-65 YAA-GM OI=10137 at $5.90 SL=4.00
BUY CALL JUL-70 YAA-GN OI=12592 at $3.20 SL=1.50
Average Daily Volume = 10.5 mln
http://www.premierinvestor.com/oi/profile.asp?ticker=AMGN
*************
NEW PUT PLAYS
*************
AGGRESSIVE:
BLDP - Ballard Power Systems $55.75 -2.75 (-2.75 this week)
Ballard Power Systems, Inc. was founded in 1979 to conduct
research and development in high energy lithium batteries. In
1983, Ballard began developing proton exchange membrane (PEM)
fuel cells. Today, these systems have evolved into
pre-commercial prototypes proving the practicality of the Ballard
fuel cell and fuel cells are widely viewed as viable alternatives
to conventional technologies. Ballard's focus is now on working
with its strategic partners to develop competitive products for
mass markets by reducing cost and implementing high volume
manufacturing processes.
Earlier this month, shares of fuel cell maker Ballard Power got a
strong lift from comments made by President George Bush when he
outlined the details of his energy plan. The president stated
that he would look to alternative sources of power to deal with
the energy shortages that have plagued various parts of the
United States, most notably California. With provisions to offer
$4 billion in credits for companies involved in alternative
energy technologies, BLDP was a direct beneficiary and with that,
the stock jumped 14 percent in one day. Since then, BLDP has
traded sideways, with a recent attempt to take out resistance at
$65 thwarted. Fans of candlestick charting will note the bearish
shooting star formation from early last week. The $60.60 level
also acted as formidable resistance for the stock. Now trading
below both its 5 and 10-dma (at $57.74 and $55.89 respectively),
it appears that further downside may be likely for BLDP. A break
below $55 support could provide conservative traders with an
entry on weakness. From there, the stock could make a quick move
down to its next support level of $53. Aggressive players may
look for entry points at failed rallies as the stock approaches
one of the numerous resistance points overhead at the 10-dma,
$56, $56.70, $57.50, the 5-dma, $59, and our closing stop price
of $60. Track sector sentiment by following movements and
direction of industry rivals FCEL and PLUG.
BUY PUT JUN-55*DFQ-RK OI= 457 at $3.20 SL=1.50
BUY PUT JUN-50 DFQ-RJ OI=1377 at $1.25 SL=0.50
Average Daily Volume = 886 K
http://www.premierinvestor.com/oi/profile.asp?ticker=BLDP
NEWP - Newport Corp. $35.11 -3.65 (-3.65 this week)
Newport is a global supplier of test, measurement and automation
systems and subsystems that enable manufacturers of fiber-optic
components, semiconductor capital equipment and aerospace
products to automate manufacturing processes, enhance product
performance and improve manufacturing yields. The key Fiber
Optics and Photonics division offers a broad line of automated
manufacturing systems that address a spectrum of applications in
the fiber-optic component manufacturing process; from pre-test
to assembly and packaging, to final device testing and burn-in.
Uncertainty over the proposed Lucent and Alcatel merger threw
Networking stocks into disarray again today and the bears took
advantage of the opportunity pushing the entire sector lower
right from the opening bell. The merger has now been called
off, but the technical damage has been done, as the Networking
index (NWX.X) closed below the $440 support level, also the site
of the 38% retracement from the rally over the past 2 months.
With negative news coming out of several big technology names
today, it is no wonder that NEWP took a big hit today, to the
tune of 9.4%. While volume was light at just over half the ADV,
the stock ended the day right on the $35 support level. This is
NEWP's first close below the 50-dma ($36.04) in a month and with
the daily Stochastics oscillator pointing south and not yet to
oversold, it looks like there is more pain in store for the
bulls. Follow the lead of the NWX index and look for aggressive
entries on any intraday bounce that fails to take out the $40
resistance level, reinforced by the 30-dma ($39.58). More
conservative players are likely to be rewarded with attractive
entry points first; consider new positions on a volume-backed
drop through the $35 support level. Below that level, NEWP is
likely to find support at $32, and then $30. We are initially
placing stops at $40.
BUY PUT JUN-40 NZZ-RH OI= 699 at $6.30 SL=4.25
BUY PUT JUN-35*NZZ-RG OI=1104 at $3.10 SL=1.50
BUY PUT JUN-30 NZZ-RF OI= 358 at $1.35 SL=0.75
Average Daily Volume = 3.85 mln
http://www.premierinvestor.com/oi/profile.asp?ticker=NEWP
*********************
PLAY OF THE DAY - PUT
*********************
JNPR - Juniper Networks $46.39 -5.77 (-5.77 this week)
As a provider of Internet infrastructure solutions, JNPR serves
Internet service providers and other telecommunications service
providers, helping them to meet the demands resulting from the
rapid growth of the Internet. The company delivers next
generation Internet backbone routers that are specifically
designed for service provider networks. JNPR's flagship product
is the M40 Internet backbone router, which complements the
recently-introduced M20, which is a router built specifically
for emerging service providers. The routers provided by the
company combine the features of the JUNOS Internet Software,
high performance ASIC-based packet forwarding technology and
Internet-optimized architecture into a purpose-built solution
for service providers.
Most Recent Write-Up
Networking stocks got slammed right from the open today on
nervousness surrounding the implications of the possible merger
of Lucent Technologies and French firm Alcatel. Whether this
was actually the cause, or just an excuse, it gave bears the
incentive to break JNPR out of its 6-week bearish wedge.
Support had been firm at $52, but that disappeared (along with
the $50 support level) before amateur hour was over. Volume
came back into the stock as the price dropped throughout the
day, finally finding some support near $46 towards the end of
the day. Sellers are definitely back in control after smashing
a couple solid levels of support and pushing JNPR below its
50-dma ($51.75) for the first time in over a month. Prior
support at $50 should now act as resistance, and that is the
new location of our stop. Aggressive traders will want to
target intraday rallies near this level for new entry points,
while the more conservative approach will be to open new
positions as JNPR drops through today's $46 support level.
Comments
Shares of Juniper broke below not one, but two key support
levels Tuesday. Furthermore, news of the broken marriage
between Lucent and Alcatel may continue to pressure networking
shares Wednesday. Aggressive traders could look to enter new
positions near the open. Those looking for confirmation might
wait for Juniper to take out its intraday low Tuesday at the
$45.75 level and target $40 on the downside.
BUY PUT JUN-50 JUX-RJ OI=14851 at $6.20 SL=4.25
BUY PUT JUN-45*JUX-RI OI= 5152 at $3.30 SL=1.75
Average Daily Volume = 29.1 mln
http://www.premierinvestor.com/oi/profile.asp?ticker=JNPR
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************************
COMBOS/SPREADS/STRADDLES
************************
A Grim Outlook For Technology Earnings...
Tuesday, May 29
Stocks ended mixed today in relatively light trading as weakness
in technology issues pulled the NASDAQ lower while the rotation
to blue-chip stocks benefited the Dow industrials. The NASDAQ
composite dropped 75 points to 2,175 but the Dow rose 33 points
to 11,039. The S&P 500 slid 10 points to 1,267 in conjunction
with the overall market slump. Trading volume on the Big Board
totaled 1.01 billion shares with declines leading advances 1,681
to 1,408. Activity on the NASDAQ was thin with only 1.6 billion
shares exchanged. Technology losers outpaced winners 2,477 to
1,362. In the bond market, the U.S. 30-year Treasury fell 3/32,
pushing its yield up to 5.85% and there was little interest in
the $22 billion auction of 13- and 26-week T-bills.
Market Activity
Technology stocks retreated today as fears of upcoming earnings
warnings weighed heavily on NASDAQ traders. Analysts at Goldman
Sachs were responsible for much of the sell-off as the brokerage
slashed revenue forecasts on Sun Micro (NASDAQ:SUNW) and the #1
data-storage firm EMC Corporation (NYSE:EMC), based on slowing
economic growth in the United States and Europe. Goldman cited a
"tough environment," indicating that checks continue to suggest
that both companies will have trouble meeting forecasts, even on
downwardly revised expectations. The unexpected profit downgrade
fueled concerns the soft economy will cut into corporate earnings
yet again and made investors cautious of high-priced technology
issues ahead of the so-called "pre-announcement season." All of
the major NASDAQ groups faltered with the heaviest losses coming
in computer hardware and networking shares. Emulex (NASDAQ:EMLX),
Brocade (NASDAQ:BRCD) and Network Appliance (NASDAQ:NTAP) were
among the worst performers and chip stocks such as Advanced Micro
Devices (NYSE:AMD) and Intel (NASDAQ:INTC) also took a beating.
Lucent Technologies (NYSE:LU) led the telecom segment lower even
as merger speculation with Alcatel (NYSE:ALA) was re-ignited by a
report that the new deal would entail a $23.5 billion stock swap.
Analysts at UBS Warburg said the Lucent/Alcatel combination would
be positive for the rest of the telecom equipment industry in the
near-term with competitors likely to benefit from the uncertainty
during the approval period and integration process. After the
closing bell, the recent speculation was put to rest after both
companies announced that they ended merger discussions with no
agreement. On the bright side, Canada's Nortel Networks (NYSE:NT)
opposed the bearish trend on some positive comments from a Lehman
Brothers analyst. Tim Luke said that while Nortel's short-term
fundamentals remain difficult, NT shares may prove attractive for
patient investors as future catalysts could include contract wins,
new products and a possible IPO of the company's optical component
business.
The Dow Industrial Average managed to finish with a respectable
gain after spending much of the morning in negative terrain. Some
of the weaker components were Home Depot (NYSE:HD), International
Business Machines (NYSE:IBM), American Express (NYSE:AXP), AT&T
(NYSE:T) and Honeywell (NYSE:HON). Among the stronger issues were
Merck (NYSE:MRK), SBC Communications (NYSE:SBC), Dupont (NYSE:DD)
and International Paper (NYSE:IP). In the broader market, major
drug, chemical, paper and oil issues generally moved higher while
gold, brokerage, utility and retail stocks declined. One positive
note; UBS Warburg's Ed Kerschner said the stock market should soon
benefit from "the sweet spot of a friendly Fed: Low interest rates
and improving earnings visibility." In addition, Kerschner doesn't
believe the Fed's easing cycle is over and he expects short-term
interest rates to be cut by an additional 25 basis points in June.
He also thinks earnings rebound and be strong enough to support
higher equity prices, with 15% earnings-per-share growth projected
for S&P 500 companies in 2002. Brian Belski, a fundamental market
strategist at US Bancorp, said the longer-term fundamental picture
for a majority of sectors within the S&P 500 reflects a market in
better shape heading into the second half of 2001. Belski said all
eleven of the S&P sectors he tracks are expected to have positive
quarterly year-over-year comparisons during the fourth quarter. At
least that's something to look forward to after the recent selling
pressure in technology issues.
Portfolio Activity:
There was very little favorable activity in the Spreads portfolio
today and the bearish trend in technology issues did not help any
of our positions in that category. The few upside moves came in
the broader-market issues such as Mellon Bank (NYSE:MEL), Watson
Pharmaceuticals (NYSE:WPI) and National City (NYSE:NCC). In the
Debit-straddles group, the downward pressure among NASDAQ stocks
produced a new winner. Penn National Gaming (NASDAQ:PENN) fell
unexpectedly to a low near $18.50 and the overall credit for the
neutral position achieved a high of $3.50. That's a $1.15 profit
on $2.35 invested; a potential gain of 50% in one week for traders
that participated in the neutral position. Another issue in that
category, British Airways (NYSE:BAB) moved to a recent high during
the session and the stock appears poised for additional upside
activity. Over the past two weeks, the issue has traded in an $8
range, well above the overall debit in the straddle, but the move
has been insufficient to provide a profit in the neutral position.
A favorable exit opportunity for the bearish portion of the play
was offered early in the month (MAY 2-4) but only those traders
who "legged-out" of the (JUL-$50) Put are ahead in the straddle.
One of the unique aspects of the recent technology slump is the
opportunity to exit (or adjust) some of the calendar spreads. A
good example is the Cisco Systems (NASDAQ:CSCO) position at $20.
The current spread; OCT-$20C/JUN-$20C has a debit of $1.50 and
since the October (call) options are less affected by short-term
fluctuations in the underlying issue, the overall credit in the
play has actually increased, providing an excellent "early-exit"
profit. Traders should evaluate any "time-selling" issues in
which the near-term implied volatility has deflated and use that
effect (when practical) to help make favorable adjustments in
those positions.
Questions & comments on spreads/combos to Contact Support
******************************************************************
- NEW PLAYS -
One of our readers suggested that we offer some "bearish" credit
spreads on technology issues, based on the renewed potential for
downward movement in the group. Indeed, today's activity on the
NASDAQ was less than outstanding and most analysts believe that
technology stocks will experience at least a brief consolidation
before share values continue to recover.
******************************************************************
MSFT - Microsoft $70.34 *** New Options Activity! ***
Microsoft (NASDAQ:MSFT) develops, manufactures, licenses and
supports a wide range of software products for a multitude of
computing devices. Their software includes scalable operating
systems for servers, personal computers and intelligent devices,
server applications for client/server environments, knowledge
worker productivity applications, and software development tools.
The company's online efforts include the MSN network of Internet
products and services and alliances with companies involved with
broadband access and various forms of digital interactivity.
Microsoft also licenses consumer software, sells hardware devices,
provides consulting services, trains and certifies integrators
and researches and develops advanced technologies for future
software products. The company is divided into three main areas:
the Business Divisions, the Sales, Marketing and Support Group,
and the Operations Group.
Microsoft options have been active in recent sessions, following
comments by Merrill Lynch analyst Henry Blodget that the appeals
court could rule soon in the antitrust case against the company.
The U.S. Court of Appeals for the District of Columbia, Microsoft
and the Justice Department have argued over the issues of breakup
remedies and the connections between the Windows operating system,
the Microsoft Office applications suite and the Internet Explorer
Web browser software. Blodget said that legal experts project a
a mixed outcome with a "possible rejection of the breakup of the
company but an affirmation of Microsoft's monopoly behavior and a
call for a new remedy." Some of the expectation about a decision
stems from the basic idea that it is about time for the court to
rule but many analysts believe it will take additional time for
the final opinions to be written. Option-trading activity in the
company has also increased amid speculation that American Online
(NYSE:AOL) is in discussions with Microsoft about using their
technology within the America Online Internet service. AOL and
Microsoft have held talks recently about including AOL in the
next version of Windows to be released this fall. Some observers
say the use of Microsoft's media technology may be part of those
discussions and analysts are divided on the possible outcome.
Since the recent technical indications suggest a solid resistance
area near $72, we believe this spread offers an excellent risk
versus reward outlook and in the event of a future rally, there
should be little difficulty in making an adjustment to a bullish
position. As always, the play should be evaluated for portfolio
suitability and reviewed with regard to your strategic approach
and trading style.
PLAY (conservative - bearish/credit spread):
BUY CALL JUN-80 MSQ-FP OI=1056 A=$0.25
SELL CALL JUN-75 MSQ-FO OI=9555 B=$0.75
INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12%
http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=MSFT
******************************************************************
RTEC - Rudolph Technologies $44.80 *** Technicals Only! ***
Rudolph Technologies (NASDAQ:RTEC) is engaged primarily in the
design, development, manufacture and support of process control
metrology systems used in semiconductor device manufacturing.
Its proprietary systems non-destructively measure the thickness
and other properties of thin films applied during various steps
in the manufacture of integrated circuits, enabling semiconductor
device manufacturers to increase yields and lower production
costs. Rudolph provides its customers with a flexible full-fab
metrology solution by offering families of systems that meet the
transparent and opaque thin film measurement needs in various
applications across the fabrication process. Rudolph sells its
products worldwide to hundreds of semiconductor manufacturers,
including both independent semiconductor device manufacturers
and foundries throughout the world.
This position was discovered with one of our primary scan/sort
techniques; identifying potentially failed rallies on issues
with bullish options activity. In this case, the premiums for
the (OTM) call options are slightly inflated and the potential
for a successful (technical) recovery is significantly affected
by the resistance at the sold strike price; a perfect condition
for a bearish credit spread. As always, current news and market
sentiment will have an effect on this issue. Review the play
thoroughly and make your own decision about the future outcome
of the position.
PLAY (very conservative - bearish/credit spread):
BUY CALL JUN-60 UXH-FL OI=244 A=$0.25
SELL CALL JUN-55 UXH-FK OI=26 B=$0.60
INITIAL NET CREDIT TARGET=$0.45-$0.50 PROFIT(max)=9%
http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=RTEC
******************************************************************
EDS - Electronic Data Systems $61.80 *** Key Moment! ***
Electronic Data Systems (NYSE:EDS) is a professional services
company that offers its clients a portfolio of related services
worldwide within the broad categories of systems and technology
services, business process management, management consulting and
electronic business. Their services include the management of
computers, networks, information systems, information processing
facilities, business operations and related personnel.
EDS was another issue that emerged in our technical search for
potentially failing stocks with bullish options activity. The
company has been in the news recently after announcing that it
it would buy Structural Dynamics Research (NASDAQ:SDRC) for $950
million, to create a new business line in computerized product
design and manufacturing. The company plans to merge SDRC with
one of its primary holdings, UGS (NYSE:UGS), a software services
firm. EDS is currently an 86% stockholder of UGS and recently
offered to purchase all of the outstanding shares of UGS that it
does not own at $27 per share. EDS shareholders are obviously
concerned about the near-term affects of the new buyout/merger
transaction and the stock has suffered on the news. Traders who
agree that the issue is unlikely to achieve an all-time high in
the next few weeks can profit from that outcome with this bearish
combination.
PLAY (speculative - bearish/credit spread):
BUY CALL JUN-70 EDS-FN OI=2276 A=$0.20
SELL CALL JUN-65 EDS-FM OI=2564 B=$0.80
INITIAL NET CREDIT TARGET=$0.65-$0.70 PROFIT(max)=15%
http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=EDS
******************************************************************
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